Trade Tensions

Trade tensions have risen with the U.S. taxing (tariffs) its consumers more aggressively on Friday and the Chinese responding. 

However, less than 0.4 percent of global GDP has been subjected to new trade taxes (tariffs). 

There is no need to sensationalize this.

With all the talk about a “trade war” between the U.S. and China and President Trump, from his side, talking about a $550 billion “all included” amount that is at stake, I think that investors could do well keeping their calm because, so far at least, we have only seen the first step in this so-called “trade war” of which the initial impact will be looked at on an industry by industry basis. 

In the U.S. for example, it’s really the farmers and the ranchers that we are hearing from first for the potential fall-out. A lot of the other components are part of supply-chains that individual companies have been and are depending on. It’s going to be an industry by industry response.

It’s harder to have an idea how this is going to play out and how this is going to end up as we haven’t seen further escalation yet. It’s also hard to figure out where it’s going to go because, quite frankly, we don’t know if the White House itself knows what the end-game is yet. There have been discrepancies in different positions within the administration, and until we have a good sense of where this is going, we can’t really try figuring out where it’s going to hit on a “macro-basis.”  

I personally think that the biggest longer-term hit is going to be general “uncertainties.” So, about investment, confidence in markets, it will be the general uncertainty about where this is going to end up and who might be next. 

Estimates are that the “real” hit to GDP go as high, at this moment, as 0.8 percent. 

This is certainly on the agendas of the Federal Reserve as well as of those of the U.S. companies. 

Last week’s June FOMC minutes inform that Federal Reserve officials said a “very strong” economy warranted continued increases in the benchmark policy rate while citing the escalating trade war and emerging-market turmoil as risks to growth.

Again, at this stage of the game, to come up with what could be the macro implications from a trade war that hasn’t escalated to where President Trump has said he could take it, is practically impossible.

Nevertheless, with the U.S. and China finally formalizing tit-for-tat import tariffs, Wall Street is gearing up to dissect U.S. corporate earnings in the coming weeks for signs of a trade war impact and whether it will affect spending plans. 

For good reasons, investors worry about the trade conflict with China, the United States' largest trading partner, could make companies delay plans for capital expenditures, which jumped in the first quarter after the late December U.S. tax overhaul that included massive tax cuts for corporations.

Emerging Markets

Mexico’s peso was the best Emerging Market (EM) currency performer after the July 1 election, posting last week its biggest weekly rally since 2011. The peso was up +4 percent on the week. Expectations are that the Mexican peso could further strengthen into the end of the year.

Mexico’s likely next Finance Minister Carlos Urzua said he sees Mexico’s 2019 inflation between 4 and 5 percent, which is at odds with the current government’s 3 percent preliminary projection.

Increasing revenue to finance his spending policies is one of the challenges facing Mexico’s president-in-waiting, Andres Manuel Lopez Obrador who has pledged not to raise taxes and has said money saved from curbing corruption can finance his spending plans, which include higher outlays on infrastructure and social benefits.

Agricultural cooperatives operating in the shadow economy are among those groups that should be paying tax, Urzua said. 

Lopez Obrador’s government will prioritize production of a basket of farm goods and take measures to increase their production, Urzua said. 

The list includes corn, beans, wheat for making flour, rice, tuna, and sardines. The government should give poor farmers fertilizer instead of money to enable them to increase production, Urzua said.

The president knows the “peso vigilantes” can sink his agenda and therefore he will take a moderate approach when it comes to public spending, according to Alfonso Romo, transition chief for the president-elect.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.